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Hypothetical Investment –
Detailed Breakdown
National Development Council
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$10 Million Project
Project Needs $10,000,000
In an Eligible Census Tract?
Is It An Eligible Borrower?
Can be a For-Profit or Non-Profit
Can Be Real Estate or Business Financing
Can Be Mixed Use Residential / Commercial IF
25% of Effective Income Is Non-Residential
Does 50% of Sales/ Services and Assets Derive From That
Location
If Yes – move ON
National Development Council
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$10 Million Project cont.
Project Needs $10,000,000
Investment Also Needs to Include NMTC Costs
Legal / Closing Costs
CDE Fees / Audits
- $250,000
- $820,000
SO – YOU REALLY NEED $11,070,000
HOW DO WE GET IT?
National Development Council
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Where Does Investment Capital Come From?
Investor Who Can Use
Federal Credits
Investment Fund
Created
Invests $11,070,000 in
Seattle CDE
This Is The QEI
Seattle
Investment Fund
LLC
National Development Council
Sub
Allocation
Receives $4,317,300 in Tax
Credits
Priced at $0.67 - $2,892,591
NMTC = 39% of QEI
Seattle Subsidiary
Investment Fund LLC
Load, Reserves
and Legal
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Where Does Investment Capital Come From?
Investor Who Can Use
Federal Credits
Investment Fund
Created
$11,070,000
$2,892,591 Represents
Equity Value of Investment
Needs NO Further Repayment
Borrows The Balance of Equity
$8,177,409
NMTC = 39% of QEI
Seattle
Investment Fund
LLC
National Development Council
Sub
Allocation
Seattle Subsidiary
Investment Fund LLC
Load, Reserves
and Legal
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Issues With Borrowed Funds
Investment Fund
Created
$11,070,000
Lender
Borrows The Balance of Equity
$8,177,409
Loan Must Be:
Seattle Subsidiary
Investment Fund LLC
-- At Least 7 Year Term
-- Interest-Only with Balloon
-- No Direct Collateral in Borrower Assets
Only Risk Capital In The Investment
National Development Council
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Where Does Investment Capital Come From?
Investment Fund
Created
$11,070,000
Seattle Subsidiary
Investment Fund LLC
Load, Reserves
and Legal
CDE Keeps $1,070,000 For NMTC Fees and Costs
$10,000,000 Remaining Is Lent To Project
National Development Council
NMTC Final Flow of Funds
How We Got The Project $10,000,000
Investment Fund L.P. or LLC
Equity
NMTC Investor
Seattle
Investment Fund
LLC
(Accumulates Investment Funds)
$11,070,000
Sub Allocation
Seattle Subsidiary
Investment Fund LLC
(Project Specific)
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Debt
Non-Recourse Lenders
and Soft Debt
Load &
Reserves
$10,000,000 To Project
QALICB
(Project or Business)
Loans Provided By CDE:
A Loan - $8,177,409
B Loan - $1,822,591
B Loan Is Permanent Equity
National Development Council
NMTC Final Flow of Funds
How We Got The Project $10,000,000
Investment Fund L.P. or LLC
Equity
NMTC Investor
(Accumulates Investment Funds)
$2,892,591 Equity Contribution
Seattle
Investment Fund
LLC
Sub Allocation
Debt
Non-Recourse Lenders
and Soft Debt
$8,177,409 Borrowed
Seattle Subsidiary
Investment Fund LLC
(Project Specific)
Load &
Reserves
$1,070,000 Fees / Costs
$10,000,000 To Project
QALICB
(Project or Business)
National Development Council
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FINAL INVESTMENT BENEFIT
Project Needs $10,000,000
CDE PROVIDES $10,000,000 IN LOANS
INVESTMENT STRUCTURE REQUIRES $8,177,409 IN DEBT
• CAN COME FROM BANK LENDER
• CAN COME FROM CITY LOAN PROGRAMS
• CAN COME FROM OWNER EQUITY
PROJECT GETS $10,000,000 – ONLY BORROWS $8,177,409
$1,822,591 (18%) COMES FROM NMTC EQUITY
National Development Council
New Markets Tax Credits
ISSUES TO PAY ATTENTION TO

Investor equity and investor debt have different risk concerns:

Equity investor is concerned about recapture so they focus on making sure the
CDE stays in the deal and any default proceeds are not returned to the lender.
They require any lender to forbear their rights to foreclose on investment debt.

Debt lender wants to be able to access the assets if they don’t get paid.
To be qualified debt – their loan:
 Can only have an interest in the partnership – not typical collateral –
so they are basically unsecured
 Typically have interest-only terms during NMTC period so there isn’t
any loan amortization

Typical responses:
 Have the same equity investor and investment lender. Limits
who can do deals.
 OR have “soft” public debt AND Owner Equity to reduce lender risks
National Development Council
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New Markets Tax Credits
ISSUES cont.

Additional lender issues – NMTC transactions want to
close at construction to bring the value of the NMTC
into the construction phase.

Brings ALL construction lender risks into play:





Development Budget Accuracy
General contractor experience
Construction schedule
GENEROUS CONTINGENCIES
Since many NMTC lenders think like permanent
lenders, you may have issues in closing for
construction.
National Development Council
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New Markets Tax Credits
ISSUES cont.

Financial Underwriting
- In the end, NMTCs are underwriting as a permanent lender to
projects. So strong operating performance is essential.
This is due to one of the few NMTC recapture concerns:

NMTC Recapture. If:
 CDE ceases to be a CDE; or
 CDE doesn’t continually invest and reinvest at least 85% of
investment; or
 CDE redeems the investment.
The last event may happen in case of default. If the project goes into
receivership and is liquidated, the CDE CANNOT return those proceeds to
the investor. They must be reinvested in another eligible project.
National Development Council
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Contacts
 For more information:
Ken Takahashi
Seattle Investment Fund LLC
c/o City of Seattle – Office of Economic Development
206-684-8378
ken.takahashi@seattle.gov
Chuck Depew
National Development Council
(206) 441-5368
cdepew@nationaldevelopmentcouncil.org
National Development Council